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China rings efficiency in $34 bln telco tower deal

15 October 2015 By Una Galani

China’s big telecom tower deal is a rare example of state-backed enterprises embracing sensible reform. The country’s three biggest carriers are combining infrastructure assets worth 214 billion yuan ($33.7 billion) in a new company to share costs. Amid a slowdown in the Chinese economy, it’s a good time to ring up efficiencies.

China Mobile, China Unicom and China Telecom will spin off more than 1.5 million towers used by their mobile phone networks in exchange for cash and shares in the jointly-owned company, which is called China Towers. The companies will then lease back the towers on terms that have not yet been finalised.

As the player with the broadest geographic coverage, China Mobile is arguably giving up some strategic advantage over its two smaller rivals. But all three get an immediate boost in the form of a capital gain on the assets, which have been valued at an aggregate 19 percent premium to their book value.

Over the next two years, China Towers will in exchange also pay 87.6 billion yuan in cash, Barclays reckons. It will fund at least part of that by selling a 6 percent stake to the aptly named China Reform, a wholly-owned subsidiary of China’s State-owned Assets Supervision and Administration Commission (SASAC), which will also take a seat on the board.

The simple act of sharing will avoid duplication in what is a capital intensive industry. The savings from cutting back the 691,000 towers the carriers may otherwise have had to build by 2016 could be as much as $24.9 billion, Credit Suisse estimated last year when the deal was first mooted. China Towers’ predictable cash flows will enable it to leverage up. The next step will be an initial public offering that would bring more private capital into China’s telecom sector.

Telecom operators in many other countries have struck deals to share infrastructure, even without the guiding hand of a common state shareholder. But at a time when international investors are increasingly sceptical of China, any evidence that state-backed enterprises are becoming more efficient is welcome.

 

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